PeopleSoft May Be Ready to Fold

October 03, 2004

By Sarah Lacy In late September at the PeopleSoft (PSFT) user conference in San Francisco, then-CEO Craig Conway referred to the 16-month hostile-takeover battle with competitor Oracle (ORCL) in Redwood City, Calif., as a bad dream that never ends. Turns out, it ended for Conway more suddenly than he expected -- and it could be ending for PeopleSoft sooner than expected as well, some analysts predict.

In a conference call with investors on Oct. 1, the Pleasanton (Calif.) software maker surprised those hooked on the PeopleSoft-Oracle soap opera when it announced Conway's ouster. The company offered few details other than that the board had lost confidence in the leadership of the CEO who helped turn PeopleSoft around over the past five years. In his place, David Duffield, the largest shareholder and founder, was named CEO.

There's little doubt Conway's ouster move was tied to how he has been handling PeopleSoft's fight to avoid an Oracle takeover. On the same conference call, PeopleSoft reported that the third quarter would look significantly better than analysts had expected, with revenue from software licenses expected to top $150 million, vs. previous estimates of about $130 million.

BATTLE FATIGUE. The question now: Will Duffield continue to battle Oracle's intentions, or will he acknowledge the inevitable, sit down with Oracle CEO Lawrence Ellison, and negotiate the best deal PeopleSoft can hope for at this point. Investors are betting on the latter: PeopleSoft's shares rose 15% on Oct. 1 to close at $22.83, just above Oracle's most recent bid price of $21. Shares of Oracle rose 5.5% to close at $11.90.

In the short term, some believe that Duffield will fight. He has a strong emotional connection to the company he founded. And as the largest shareholder, he's PeopleSoft's counterpart to Ellison, with more credibility and negotiating leverage than a hired CEO.

But the odds are that PeopleSoft is wearying of the battle, realizes it has lost its antitrust argument, and is preparing to head to the bargaining table. After all, a good portion of Wall Street has deemed the deal's price tag a good one for PeopleSoft's shareholders, and the board's job is to act in their interest.

SOUNDS OF SILENCE. And according to an Oct. 1 statement, the Justice Dept. has decided not to appeal last month's U.S. District Court decision that would permit the deal to go forward. European antitrust regulators are said to be ready to give their O.K., too. And a trial on Oracle's efforts to force PeopleSoft to eliminate its "poison pill" anti-takeover provision is set to begin next week in Delaware.

PeopleSoft's silence also is telling: If it intended to continue fighting Oracle so vociferously, why wouldn't it have affirmed that stance in the face of such a dramatic change in leadership? "Dave Duffield is a pragmatist and a capitalist, and as long as the price is right and the customers are well taken care of, the employees are well taken care of, he's willing to talk," says Albert Pang, research director at market research firm IDC.

The real question may not be what PeopleSoft intends to do, but how Ellison will react to the management change. If PeopleSoft now makes overtures to sit down with Oracle, the software community at long last will be able to figure out whether Ellison really wants the company or just wanted to destroy it, says Rob Enderle of Enderele Group, a San Jose (Calif.) research group. Up until now, Enderle had assumed the latter.

IT WAS PERSONAL. Software companies' greatest assets are people, and it's challenging to acquire people through a hostile takeover. And as the battle has dragged on, the uncertainty has eroded the value of PeopleSoft's brand in the eyes of current and prospective customers, analysts say.

Another motive for Ellison was taking down Conway, who used to work at Oracle. The battle had clearly gotten personal, with Ellison saying in the past that he was looking forward to firing him when the deal went through. Now that the personal element has been removed, what will Ellison do?

Although chief concerns have been that Oracle would eliminate PeopleSoft products and jobs, the negotiation ultimately will come down to price, analysts say. Now that PeopleSoft has given a little in replacing the acrimonious Conway, Ellison will have to give a little, too. This soap opera may be moving to its final act. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau